The Conservative government’s decision to become an advocate of higher wages for the low paid surprised many, not least the Labour party, on whose lawn the tanks have now been parked. The minimum wage is to slowly morph into a ‘living wage’ reaching £9 an hour by 2020. Having secured its position until the next election, the government is moving to appeal to Labour voters by siding with those at the lower end of the income scale.

This will win them votes, but what will be the stock market impact?

Slimmer margins all round

We can expect a number of sectors to suffer from rising wages at the bottom end of the scale. Retailers, outsourcing firms and pub companies are all at the forefront of these changes, employing staff that require little training. Also on the list will be supermarkets, restaurant firms and hoteliers. All these firms use a high degree of transient staff, such as students, looking to earn extra cash, and who may not stay with the company for more than a medium-term period.

Crucially, some firms have already broken cover to either inform the market of wage increases ahead of time, or complain about the impact of the changes and defend their existing pay schemes. A classic of the latter is pub group JD Wetherspoon, which took the opportunity in its latest results to discuss at length the opportunities available to its staff.

We can expect further announcements from these sectors as the year goes on. Like a rising home currency, which often takes the blame for poor performance, this hit to margins will be deployed as a convenient excuse for poorer performance. Shares in firms like JD Wetherspoon and Capita have already suffered, and may continue to do so, underperforming the broader market on a sustained basis as wages continue to rise and margins shrink.

Nonetheless, it is still something that investors should keep an eye on. With rising wages putting a drag on performance, investors may well wish to shift some allocations away from sectors such as supermarkets, retailers and pubs, and look towards the higher end of retailing where lower wages are not such an issue and margins tend to be wider.

The race begins

Lidl has opened up what could become a new battleground for supermarkets by raising wages for many of its staff. Crucially, they will not raise prices to cover the increased cost. This raises the prospect that its UK peers, already suffering the impact of Aldi and Lidl’s entry into the British supermarket arena, will need to follow suit. With a price war already underway, it looks like these big name supermarkets will face further margin pressures, putting the shares at risk of another sustained downturn.

At least this will mean that prices will not increase immediately, removing one potential area of worry for UK consumers. Indeed, in the never-ending battle for market share, we may actually see a boost to the number of promotions and offers. With Aldi moving into the online delivery market, the competition is likely to hot up still further. This will be bad news for shareholders, who have already seen the supermarkets lose significant chunks of value, in Tesco’s case, the shares are down 46% from the beginning of 2014.

For the broader food retail sector, the early bounce this year in share prices has evaporated.

Indeed, the sector is well on its way back to the lows of 2014. With no sign of a real turnaround in trading for the big listed supermarkets, and cost pressures on the rise, this may be the start of a fresh bear market in the sector.

Chris Beauchamp is a market analyst at IG Group

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